Gupta Gets Two Years for Leaking Inside Tips

Former Goldman Sachs director Rajat Gupta was sentenced to two years in federal prison for leaking corporate secrets about the bank to a hedge fund at the height of the financial crisis. The WSJ's Ken Brown puts Mr. Gupta's sentencing in context.

By

Michael Rothfeld And

Dan Strumpf

Updated Oct. 25, 2012 7:05 a.m. ET

Former Goldman Sachs Group Inc.GS-1.03% director Rajat Gupta was sentenced to two years in federal prison for leaking corporate secrets about the bank to a hedge fund at the height of the financial crisis.

The prison term imposed by U.S. District Judge Jed Rakoff in Manhattan marks a nadir for Mr. Gupta, who became the most prominent figure caught in the push against insider trading by criminal authorities. He was implicated in 2010 in the investigation of former Galleon Group chief Raj Rajaratnam, his friend and business associate.

His tip about Berkshire Hathaway Inc.'s impending investment to shore up Goldman during the crisis was "disgusting in its implications" and "a terrible breach of trust," said Judge Rakoff before he handed down the sentence. He added: "Others similarly situated to the defendant must…be made to understand that when you get caught, you will go to jail."

More on the Case

Read The Journal's previous coverage of developments in the Galleon insider trading case, which exposed links between corporate insiders and a hedge fund that used tips to make profits. The case has netted several high-profile prosecutions.

The judge also ordered Mr. Gupta, the former head of McKinsey & Co., the global consulting firm, to pay a $5 million fine and said he would face one year of supervised release after finishing his prison term. Prosecutors had asked for a term of up to 10 years. He is appealing his conviction.

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There is no parole, but defendants usually serve only 85% of their sentences, so Mr. Gupta could be out in less than 21 months.

Wearing a dark blue suit and light blue tie, Mr. Gupta leaned back with his mouth turned down during the hearing and showed no visible reaction when the judge announced the sentence.

"The last 18 months have been the most challenging period of my life since I lost my parents as a teenager," he told the judge before sentencing. "I lost my reputation that I built over a lifetime."

Under Manhattan U.S. Attorney Preet Bharara, 72 people have been charged with insider trading since late 2009, and 69 have pleaded guilty or been convicted.

So far, 37 of those people have been sentenced to a total of roughly 68 years in total prison time. Thirteen of those cooperated with the government, all but one of whom got probation.

Galleon's Web

Criminal complaints and developing disclosures in the Galleon insider trading case allege a far-reaching and complex scheme. Here, the known and alleged relationships.

The sentence comes as Mr. Rajaratnam, the central player in the recent insider-trading scandal, plans to appeal his conviction Thursday in a New York federal appeals court. Mr. Rajaratnam is serving an 11-year prison sentence for insider trading. Another insider-trading trial is set to begin next week.

Mr. Gupta, 63 years old, was criminally charged last year with divulging information about Goldman and Procter & Gamble Co.PG-0.89%, where he also was a director. In June, a jury found Mr. Gupta guilty of three counts of securities fraud and one count of conspiracy for giving Mr. Rajaratnam tips about Goldman during the financial crisis, sometimes just moments after he learned of them, including that Warren Buffett's Berkshire Hathaway would invest $5 billion in the bank in 2008.

Goldman said in a statement: "We are disappointed that Mr. Gupta breached his duties as a director and violated our shareholders' and the firm's trust. We hope today's decision brings this sad chapter to a close."

Mr. Rajaratnam used the tips to earn millions of dollars for Galleon, prosecutors said, though Mr. Gupta didn't trade on them himself. Prosecutors said he benefited from his business relationships with Mr. Rajaratnam. Mr. Gupta was acquitted of two securities-fraud charges, including the only one relating to P&G.

Under federal sentencing guidelines, prison terms for insider-trading cases are largely based on profits, or the losses avoided, because of the illegal tips. The defense disputed the guidelines prosecutors and a probation officer had calculated for Mr. Gupta, and Judge Rakoff determined a lower range of 6.5 to eight years. The guidelines are advisory, and Judge Rakoff often imposes sentences below them.

Judge Rakoff received letters of support for Mr. Gupta from hundreds of prominent supporters, including Microsoft Corp.MSFT-0.38% co-founder Bill Gates, the doctor Deepak Chopra, and former U.N. leader Kofi Annan.

Their contentions that Mr. Gupta deserved leniency because he had lived an otherwise exemplary life and given many years to health-care, poverty, education and other philanthropic causes, were set against the legal requirement that a judge issue a sentence that will discourage others from similar crimes.

Mr. Bharara said in a statement: "With today's sentence, Rajat Gupta now must face the grave consequences of his crime—a term of imprisonment…We hope that others who might consider breaking the securities laws will take heed from this sad occasion."

Since 2010, the 26 insider-trading defendants who didn't cooperate with prosecutors have received an average sentence of two years and 10 months. That was 36% below the midpoint of their average federal guideline range of 37.5 to 46.5 months.

Judge Rakoff, who has criticized the guidelines as simplistic and severe, issued six sentences in that period, not including Mr. Gupta's, that averaged 21 months and were 46% below the midpoint of the guidelines, lower than his colleagues.

Mr. Gupta's lawyers argued that he be given probation and ordered to do "rigorous" community service, possibly in rural Rwanda, an idea the judge dismissed as a kind of "Peace Corps for insider traders."

Judge Rakoff said it was unquestionable that Mr. Gupta was "a good man."

"But the history of this country and the world, I'm afraid, is full of examples of good men who do bad things," he said.

The judge denied a request by Mr. Gupta's lawyers to allow him to remain free during his appeal. He must report for prison on Jan. 8. The judge, at the request of Mr. Gupta's lawyer, said he would recommend Mr. Gupta be sent to the minimum security prison in Otisville, N.Y.

Mr. Gupta's was a classic American success story. He grew up in New Delhi, excelling academically despite the death of both his parents when he was in his teens and coming to the U.S. to attend Harvard Business School. In 1973, he joined McKinsey in New York and climbed the ranks there for two decades until he was elected managing director in 1994 at age 45, becoming the first Indian-born chief of a U.S. multinational corporation.

Mr. Gupta was a founder of the Indian School of Business in Hyderabad, chairman of the Global Fund to Fight AIDS, Tuberculosis and Malaria, and worked with former President Bill Clinton at the American India Foundation.

The criminal case forced Mr. Gupta to withdraw from his positions on corporate boards and philanthropic groups. His supporters, from corporate CEOs down to his barber and tailor, urged the judge to let him continue in charitable work.

"This is a fall from grace of Greek tragic proportions," Mr. Gupta's lawyer, Gary Naftalis, told the judge in pleading for leniency. "I think he has suffered punishment far worse than prison already."

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